Retirement Savings or Pay Down Mortgage?
Here's a question for you: pay down the mortgage or slap that extra cash into your 401k? Build your RRSP or bump off your house debt? According to an article in the Toronto Star, you should work on becoming debt free first.
Apparently, this is particularly true if you are a young couple with a young family. This advice comes from Malcolm Hamilton, a pension actuary with consulting company Mercer, in Toronto. Pay down that mortgage first, he says. Get out of house debt as quickly as possible by putting any cash you can directly against the principle of your mortgage loan. He calls this "a risk free" proposition.
Paying off your mortgage first also saves you after tax dollars that you would be paying on interest over the life of that mortgage. However, the tax benefits vary based on where you live. Keep in mind that in Canada, you don't get any tax breaks for your mortgage. In the US, you do get a tax deduction for mortgage interest, but you still have to pay that interest first with your precious after-tax dollars. Also, tax deductions don't necessarily save you the full amount that you paid out in the first place. According to most tax planners, it's always better to avoid paying tax in the first place, than to get the money back afterwards.
Another point in favour of paying off your mortgage is that you have a very low risk investment that you are paying off. Your home is a virtually "guaranteed" 6 percent return on your original investment. Can your retirement portfolio say that? (I know that mine can't; when the stock market has a bad year, so does my retirement fund.)
Here's the trick to this approach: when the mortgage is gone, then you save like the proverbial ant, as opposed to spend your windfall like the foolish grasshopper. Take the money that would have gone into a mortgage payment and save it in your 401k or RRSP.
Have you been convinced that you have to save for retirement now or live like a pauper when you're older? Not so, says Hamilton. He doesn't subscribe to the theory that you will need to replace 70 percent of your working income in order to retire comfortably. Let's face it: if you've followed this approach, you are mortgage-free and probably kid-free (unless you waited until your 40's to finally have kids, like I did). You no longer need fancy suits for the office, nor are you commuting to work every day. So your expenses will go down considerably. Hamilton estimates that you can live quite well on half of your pre-retirement income.
So, if you have been paying into your retirement and just making the regular payment on your mortgage, you might want to rethink that strategy.